Faced with a 2012 year-end budget deficit of US $10.8 billion — some 4.2 percent of gross domestic product (GDP) — the new government of re-elected Israeli Prime Minister Benjamin Netanyahu is targeting social subsidies, ministerial spending and current tax rates in efforts to drive deficit levels down to 3 percent of GDP in accordance with Bank of Israel directives.

As part of the draconian deficit reduction program, Finance Minister Yair Lapid is proposing a 3 billion shekel ($830 million) base cut to Israel’s defense budget for 2014. An additional cut of 1.5 billion shekels has also been discussed, although it is unclear whether, if approved, it would apply to the 2014 budget or the remainder of the current year.

Political newcomer Lapid and his “There is a Future” party swept into the second-largest voting bloc of Netanyahu’s coalition government last month with promises of social justice, burden-sharing and strengthening Israel’s middle class. He has repeatedly assailed the relatively disproportionate levels of Israeli defense spending, which Treasury statistics peg at 7.4 percent of GDP and 25 percent of the national budget.

According to Israeli Treasury data, Israel’s net 2012 defense budget after adjustments stood at 53.6 billion shekels, which included $3 billion in US military grant aid.

Proposed cuts, defense and industry sources say, would have a bludgeoning effect on Israel at a time of new and multiplying threats along all of its borders and beyond.

Furthermore, according to a former MoD director and two former officers on the Israel Defense Forces (IDF) General Staff, the planned cuts violate a 2007 understanding with Washington that incremental hikes in annual military aid — from $2.4 billion to the current level of $3.1 billion — would not be used to cover proportionate cuts in Israel’s defense budget.

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“The Americans wanted to be sure Israel didn’t intend to cut its own budget in proportion to US increases,” a retired general said in reference to a 10-year, $30 billion military aid package negotiated under the administration of former US President George W. Bush.

“The defense establishment is not detached from economic and social needs and must provide support for the budget deficit created last year,” Israel’s new Defense Minister Moshe Ya’alon said in an April 16 Independence Day address.

“But,” said the former strategic affairs minister and former Israeli military chief of staff, “it is our duty also to remember that its qualitative edge must not wear down, because we’ve not yet achieved peace and quiet, and we may yet find ourselves in military conflicts on the borders, away from them and within them.”

In interviews here, political and security sources expected Lapid and Ya’alon to work much more congenially than Yuval Steinitz and Ehud Barak, their respective predecessors in Netanyahu’s former government, toward an agreement where short-term defense cuts would be gradually restored once the economy improves.

In his prior government, Netanyahu was forced to intervene in unusually public and acrimonious battles between his finance and defense chiefs. This time around, the new ministers at MoD and the Treasury are more likely to direct their respective staffs to seek common ground, coordinate priorities and focus on long-term benefits to accrue through cooperation, sources here said.

“At the outset of the new government, with new personalities in charge and with so much at stake, it’s an opportunity for MoD and the Treasury to agree on a cooperatively prioritized, multiyear plan of short-term sacrifices in exchange for long-term gain,” said retired Brig. Gen. Maharan Frozenfar, former head of MoD’s budget directorate.

Nevertheless, proposed defense cuts — even in the short-term — are expected to force closure of multiple reserve combat divisions and significant reductions in manpower beyond the 4,000 career, mostly noncombat service members now slated for layoffs or early retirement, sources here said.

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Similarly, the proposed base cut of $830 million in 2014 and beyond would terminate or delay myriad indigenous development and procurement programs, including surface ships, unmanned aircraft, future block upgrades to Israel’s digital command and control network, actively protected armored vehicles and more.

FMF Protected, Despite Sequester

Israel’s $3.1 billion in annual Foreign Military Financing (FMF) grant aid, part of the US State Department budget, however, will not be reduced due to planned supplements aimed to shield the account from the automatic cuts mandated by sequestration, US Secretary of State John Kerry told US lawmakers April 17.

“There will be a plus-up, and then a reduction from that plus-up. But still there is a sequester that will apply to everything,” Kerry said of further supplements planned to preserve the $3.1 billion FMF earmarked for Israel in 2013.

US regulations governing Israel’s use of FMF allow the MoD to convert 26.3 percent of annual security assistance — $815.3 million in 2013 — into shekels for indigenous research, development and procurement programs. The remaining 73.7 percent is used to fund Israeli purchases of US-produced weaponry, subsystems and defense services.

Therefore, procurement of Lockheed Martin F-35 joint strike fighters, US-built Namer heavy armored carriers and other big-ticket US systems could face delays, but will not suffer as big a hit as indigenously developed modernization programs, sources here said.

But given adamant refusals by IDF General Staff to cut back on training and readiness, projected cuts will disproportionately target near-term research, development and procurement plans.

In an address to the Herzliya Conference here last month, Lt. Gen. Benny Gantz, IDF chief of general staff, acknowledged the need to support the government-wide deficit reduction drive. He warned, however, “not to make mistakes” in determining Israel’s future-year defense funding levels.

“Some say the IDF is too big for our country, but I say the IDF is not too big for the threats this country faces,” Gantz said. “We’ll need to continue to strive toward efficiency. ... But it is forbidden to allow our Army to hollow.”

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Referring to the IDF’s five-year plan through 2017, Gantz said the military has taken risks in prioritizing funding necessary for preserving near-term readiness while building future capabilities.

“We want a quicker, more lethal and more adaptable Army to bring results as rapidly and decisively as possible. That’s our direction. But I won’t mortgage present capabilities for fruits of the future ... because tomorrow we can find ourselves in war,” Gantz said.

In solidarity with the defense and other sectors to be affected by the looming budget cuts, Avigdor Lieberman, chairman of the Knesset Foreign Affairs and Defense Committee and co-partner with Netanyahu’s Likud-Israel Our Home Party-led coalition government, is challenging ministers, deputy ministers and lawmakers to shave their salaries by 10 percent. Similar to pay cuts undertaken by senior US administration officials in support of civil service personnel harmed by sequestration, the Lieberman initiative is symbolic, yet highly appreciated here.

“It’s clear to everyone that this salary cut won’t add billions to the economy and won’t solve the budgetary problems we’re dealing with. … But we need to set an example,” Lieberman wrote April 11 on his Facebook page.

In addition to the planned US State Department plus-up that will ensure Israel’s $3.1 billion military assistance in 2013, officials here are hoping the Pentagon likewise will reprogram additional funds to shield $480 million in current-year funds for Israeli rocket and missile defense programs.

Under the continuing resolution for 2013 defense appropriations, Israel is slated to receive $211 million for Iron Dome, $149.7 million for David’s Sling, $74.7 million for the Arrow-3 upper-tier interceptor and $44.3 million for Arrow-2.

According to the US Congressional Research Service (CRS), Pentagon funding for Israeli rocket and missile defense programs may be sequestered by some $37 million. Those appropriations, said CRS Middle East specialist Jeremy Sharp, “are considered non-exempt defense discretionary funded and are therefore subject to a 7.8 percent reduction.”

In his April 11 report on US Foreign Aid to Israel, Sharp said the Defense Department “could reprogram additional amounts of aid to Israel in order to compensate for lost funding as a result of sequestration.” However, he cautioned that such compensation would trigger cuts elsewhere . ■